Cuba Legalizes Private Companies, Foreshadowing Currency Unification

Cuba announced yesterday the next step in its economic transition by allowing private businesses to have legal status.

Previously, the communist government permitted individuals to operate as self-employed workers under several hundred clearly-defined roles such as taxi driver. The latest announcement will likely take months to become law.

“Private property in certain means of production contributes to employment, economic efficiency and well-being, in a context in which socialist property relationships predominate,” reads one section of the “Conceptualization of the Cuban Economic and Social Model of Socialist Development.”

Once considered to be a mortal threat to the Cuba regime, private businesses – and business people in particular – will now have official status and will hopefully find an end to the practice of radom crackdowns and suspicion that threatens to undermine emerging capitalists seeking to satisfy demand for goods and services.

Price distortions tend to undermine capital formation and private sector employment. As the Cuban government gropes for private sector alternatives to government employment in inefficient state enterprises, it is no surprise that the emerging private restaurants (paladares), taxi drivers and small shops would be officially integrated into the economy. The promise it that these small businesses successfully negotiate price distortions and offer stability amid the wrenching transition away from a centrally planned economy.

Six years ago, Castro turned heads by suggesting to an American journalist that, “the Cuban model doesn’t even work for us anymore.”

Larger numbers of Cubans moving toward employment in the private sector will likely set the stage for Cuba’s transition to a single currency economy. Cuba’s dual currency – CUC (convertible currency) and the CUP (Cuban pesos) – are considered to have the same value within state enterprises. This massive price distortion helped insulate CUP prices from inflation during the economic crisis that followed the collapse of the Soviet Union. Today’s dual currency makes it almost impossible for investors to estimate the real costs of doing business on the island or the value of state companies. A dual currency system carries the added burden of protecting imports at the expense of domestic production. One tangible result today is that Cuba is forced to import the majority of its food despite having fertile soil and ample labor.